Growth stocks have been getting hammered over the past year as investor sentiment has swung back in favor of value stocks. Companies that generate little or no profitability have been hit especially hard since the Federal Reserve is poised to begin raising interest rates this month and pare back on its "easy money" policy to fight inflation. Share prices of Wix.com (WIX -0.30%) have been no exception, and are now down some 75% from their all-time high reached in early 2021.
Wix stock took yet another tumble following the release of its fourth-quarter 2021 financial update and preliminary guidance for 2022 and 2023, which disappointed some investors. It looks like Wix's days of hyper-growth are over, but it certainly isn't time for shareholders of this cloud-based web development services company to panic either.
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One more lap of early-pandemic boom time
2021 ended up being a pretty good year for Wix. Revenue grew 29% year over year to $1.27 billion, building on its 30% gain in revenue in 2020.
However, like so many other internet outfits, Wix's growth rate accelerated early in the pandemic as companies and aspiring entrepreneurs sought out digital tools to keep the gears of business turning. Now Wix is lapping that boomtime, and its growth trajectory is slowing as a result. Fourth-quarter 2021 revenue was up "only" 16% year over year, and the outlook for Q1 2022 implies just an 11%-to-13% increase. Granted, this expansion will compound on top of Wix's 41% year-over-year revenue growth rate during the first quarter of 2021, but the outlook is nevertheless a significant cooldown.
The good news is that Wix will have easier year-over-year comparables starting in Q2 2022 -- we'll no longer be lapping year one of the pandemic at that point. But there's bad news too. Wix is still dealing with a high level of uncertainty among its global user base because of the Omicron variant, supply chain issues, etc. Management eliminated specific full-year financial guidance to account for these uncertainties and instead said "we expect year-over-year growth of total revenue to accelerate each quarter through the end of 2022."
In other words, we shareholders can expect Wix to grow faster than the 11% to 13% management is predicting in Q1, but we don't know how much faster. If there's anything stock market participants hate most, it's uncertainty. Thus the elimination of specific longer-term revenue guidance is the reason Wix stock took another step down following the quarterly update.
A cheap stock for the long run?
Wix management did throw investors a bone to compensate for no more full-year financial guidance. Wix has been spending heavily the last couple of years to maximize its growth potential, which has reduced free cash flow to close to nil (free cash flow profit margin was only 2.2% of revenue in 2021, compared to a 13% free cash flow margin in 2020). Included in these figures is money Wix has been spending on its new headquarters construction, specifically $23.4 million in 2021 and $2.5 million in 2020. Excluding those amounts pushes the "adjusted" free cash flow margin up to 13% for 2020 and 4% for 2021.
In exchange for no full-year 2022 sales guidance, shareholders were instead presented with a two-year outlook for free cash flow margin: about 5% for 2022 and 8% to 10% in 2023.
The big question now is whether Wix is a deal given this new profitability projection into 2023. I'm going to assume Wix grows 15% in full-year 2022 and 2023 (which, incidentally, is slightly less than the consensus among Wall Street analysts as of this writing). Working from a base of revenue of $1.27 billion in 2021, that would put Wix sales at $1.68 billion in 2023, meaning free cash flow (assuming management's 8% to 10% margin prediction for next year) could be $134 million to $168 million.
That means Wix stock currently trades for 28 times (if the profit margin is 10%) to 34 times (if the profit margin is 8%) enterprise value to 2023 free cash flow using my assumptions above. If Wix's top team is sandbagging and actual results are better than the outlook provided, the stock's current valuation would obviously wind up being cheaper.
Wix's days of fast growth exceeding 20% appear to be over for now, but I'm not giving up on the stock yet. The internet is an essential tool for all businesses now, and the Wix platform for building websites and other basic online business services is still in a good position to capitalize on the opportunities. Shares aren't cheap, but I don't think they're expensive either given where the company is headed in the next couple of years -- so I plan to hold onto my position for now in this e-commerce stock.
